“Black boxes”: making insurance fairer?

Financial Services Team Blog

Benice Camps

I was having a catch up with one of my friends who had recently bought herself a new car.  I couldn’t help but wonder just how much a newly-qualified young driver living in Central London had to pay for her motor insurance.

She went on to tell me how she had called numerous insurance companies for the cheapest quote and had still been unable to get one for less than £2,000 per year….  Ouch!  Finally, she called an insurer, explained her situation and they told her about a type of insurance they could offer called “black box” insurance.

This “black box” or Telematics car insurance, she discovered, is a fairly new form of insurance being offered by an increasing number of insurers which offers drivers the opportunity for cheaper car insurance premiums provided they can prove themselves to be careful drivers.

Hmmm…. Cheap car insurance that rewards careful driving; sounds pretty good, right? But first things first, just how exactly does an insurance company decide who is a careful driver and who isn’t, and who would really benefit from this anyway?

Well, the thing that separates these insurance policies from others is that the insurer installs a “black-box” into your vehicle.  This black box then monitors your driving habits, including things like the time of day at which you drive, which roads you drive on and your accelerating and braking habits.  This information is transmitted via GPS to the insurance company who use the information to determine how careful a driver you are and to adjust your premiums accordingly.  So it’s simple… if you’re a careful driver, your premiums go down.

One thing that is particularly clear from the way Telematics insurance policies are being marketed is that they are targeted towards currently marginalised groups of drivers, notably young drivers.  With new European legislation effective from December 2012 which prevents insurers from taking gender into consideration when pricing policies, the price of premiums should fall for men but increase for women, particularly those under 25.  One of the biggest benefits of Telematics is that it could possibly counterbalance this rise to give everyone an equal chance at lowering their premiums if they can prove themselves to be “safe” drivers.  The timing is perfect and according to the Co-Operative (as of July 2012) 80% of their young drivers had earned a Safer Driving Discount with their “Smartbox” insurance.

Telematics insurance is certainly becoming more popular.  A study conducted in July 2012 by the British Insurance Brokers’ Association (BIBA) found the number of live telematics insurance policies increased from 12,000 to 100,000 between 2009 and 2011, and again to 180,000 in just the first six months of 2012. Though this growth could have been in anticipation of this new gender legislation, it could also be attributed to meeting consumer expectations. Recent Harris Poll data shows that 32% of car insurance policyholders believe in-car devices that monitor driving style should be a factor in pricing premiums.

It is clear there are certainly some benefits of Telematics insurance and not just in terms of the price of premiums.  For example, one thing that is unique about having a black box installed is that some insurance providers, such as the AA, are also able to offer anti-theft tracking. These boxes do use GPS tracking after all, so this makes sense.

Additionally, it is able to help tackle some safety issues such as speeding.  Using the Co-Operative’s ‘Smartbox’ insurance as an example, if a vehicle is driven above the speed limit on regular instances the driver is sent warnings via email and their online dashboard where they can log in to monitor their driving score.  If they receive six warning alerts in a month or eight before their next renewal they will receive nine days notice that their policy will be cancelled.  This is definitely an incentive for drivers to watch their speed.
The biggest drawback of course relates to privacy.  Being monitored everywhere you drive and having all this information stored away just has a bit of a Big Brother feel to it.  Yes, insurance companies have to adhere to data protection laws but with countless stories hitting the headlines about misuse of personal data and Instagram’s recent attempt to change its terms & conditions as an example, should we really be actively giving our permission to have our actions monitored 24/7?  While I can hear the warnings of great writers and intellectuals like George Orwell and Michel Foucault echoing in my head, I can’t help but wonder if we have all that much say in the matter anymore.  If being able to afford to drive a car involves giving up your right to go unmonitored wherever you go, are young people really being given a fair chance with Telematics insurance?  I’m just not convinced.

Harris Poll data collected between 11th- 18th December 2012 amongst a sample of 1007 adults in Great Britain aged 17+.  Data was weighted on age, gender, region and social grade to bring figures in line with the general population.